Dow Chemical Raises Prices For Second Time in a Month

By ABHA BHATTARAI; Louis Uchitelle and David Jolly in Paris contributed reporting.

Published: June 25, 2008

The Dow Chemical Company said Tuesday that it was raising prices for the second time in a month to offset a ''relentless rise'' in energy costs, a sign that companies may increasingly have to pass on price increases to their customers.

The increase of as much as 25 percent -- the largest in the company's history -- comes after a 20 percent rise last month that the company said did not go far enough given the continuing surge in energy prices.

Dow, which makes products ranging from pesticides to plastic wraps, also said it would impose freight surcharges of $300 for each truck shipment and $600 for each rail shipment beginning Aug. 1 in the United States. In addition, it will scale back production in plants across North America and Europe.

Andrew N. Liveris, the company's chairman and chief executive, said the changes were ''extremely unwelcome but entirely unavoidable'' as oil and natural gas continue to set records. Oil prices are up more than 40 percent this year and have risen $9 a barrel since Dow's earlier price increase. Natural gas is up more than 70 percent this year.

''There came a point where the surge became so ridiculous that we had to raise prices,'' Chris Huntley, a company spokesman, said, adding that the latest price increase would affect everything from fabric and cushions to CD cases, Styrofoam and car parts.

Analysts said they expected other companies to follow suit. When Dow announced last month's increases, it spurred a series of similar increases by other chemical manufacturers, including DuPont and BASF.

Dow's announcement is the latest indication that companies are beginning to pass along the burden of high energy prices to consumers. Until now, those prices had largely been absorbed by company profits because market competition prevented retailers from increasing prices at their stores even as skyrocketing costs continued to strain earnings. But extreme pressure is building in the production chain.

For example, Lowe's, the home improvement company, has been receiving ''unprecedented requests'' for price increases from its suppliers, Robert F. Hull Jr., the chief financial officer, said at a conference. Mr. Hull added that the company had been absorbing price increases itself ''to maintain the supply of product,'' which has put a strain on gross margins, but he forecast that some of that increase would be passed along later this year.

In addition to soaring energy costs, companies are also having to deal with the increase in the cost of raw materials.

Posco of South Korea, one of the world's largest steel producers, said Tuesday that it was raising prices by more than 20 percent. That followed an agreement Monday between the global mining company Rio Tinto Group and the biggest steel maker in China, Baosteel, to raise the price Baosteel pays for Australian iron ore by as much as 97 percent.

''It's clearly a global trend that the higher costs of raw materials are being passed on along the production chain,'' said Holger Schmieding, chief European economist at the London office of Bank of America. ''Companies have no alternative but to pass that along to their customers.''

Producer prices in the United States rose 7.2 percent in May from a year earlier, while comparable euro zone prices rose 6.1 percent in April, the latest month for which data were available. Chinese producer prices are rising at nearly a 12 percent annual rate.

The rise in prices also partly reflects the weakness of the dollar, as producers outside the United States demand more of the currency for their goods as its buying power declines. In addition, a ripple effect has been created in which the rise in crude oil costs has carried over into other sectors.

Economists say the $664 billion chemical industry has been among the hardest hit by soaring energy prices. Every $1 increase in crude oil prices costs the industry $660 million a year, said Kevin Swift, chief economist at the American Chemistry Council.

For Dow Chemical, its feedstock and energy costs, which are up more than 40 percent since last year, have increased fourfold in the last five years, to more than $32 billion this year. Dow, whose shares fell nearly 3 percent on Tuesday, has been steadily increasing prices for the last several years, but it is only in the last month that consumers have been directly hit.

''These costs have surged so much that the middle guys say they can't absorb any more,'' Mr. Liveris said in an interview this month. ''There is no reason the middle of the supply chain should have to absorb it.''

PHOTO: A Dow Chemical complex in Midland, Mich. The company, which increased prices by 20 percent last month, now says costs are forcing a second increase, this time by up to 25 percent.(PHOTOGRAPH BY STEVEN SIMPKINS/ASSOCIATED PRESS)(pg. C2)